Can i convert sole proprietorship to llc

You'll also update sole proprietorship registrations including business permits, licenses, and trade name registrations , bank accounts, and contracts to reflect the change. Becoming an LLC offers you a number of benefits, including protecting your personal assets from the debts of the business and adding credibility to your business by communicating to vendors and customers that you own a formally registered company.

However, an LLC is not an option for every company, and converting to that structure might mean you will pay more taxes and fees than had you stayed a sole proprietorship. As soon as you begin doing business by yourself and in some states, with your spouse , you have a sole proprietorship. In the eyes of the law, the sole proprietorship and the owner are one and the same. When the business owes a debt, so does the owner. If someone brings a lawsuit against a sole proprietorship, it is the same as suing the owner.

The owner's personal assets like his car and bank account, are on the line to satisfy the debts of the business. An LLC is its own business entity, separate from the owner. The LLC does not exist until the owner forms it with the state. The LLC owns property and enters into contracts. This business structure provides limited liability protection for the owner, which means that owners are not personally responsible for the debts of the business. When you own a sole proprietorship, you do not file a separate business tax return, nor do you pay corporate tax.

You report the business income and losses on your personal tax return. An LLC has more options when it comes to taxes.

By default, after you form an LLC you will continue to pay taxes as a sole proprietor, and you can continue to avoid corporate tax. Converting to an LLC takes time and might cost you more money than continuing your business as a sole proprietorship. You will not owe additional federal taxes unless you elect C Corporation tax status.

Small businesses tend to choose the S corporation designation. S corporations pay their taxes only on dividends rather than paying full corporate taxes. LLCs protect the members' personal assets from harm from lawsuits and creditors. In most states, owners do not need to pay corporate taxes in order to have the business' revenue pass through to their personal accounts. LLCs offer a greater amount of flexibility in profit distribution between owners.

When you incorporate your business, personal assets get separated from the business' assets, and they are protected from bankruptcies and lawsuits. Businesses that have shaky funding or are in an industry where lawsuits are common are wise to incorporate. You might also incorporate if you have significant personal assets to protect.

There are also significant tax savings with corporations, so highly profitable companies tend to incorporate. An LLC filing creates a new legal entity or "person" that has separate legal properties from the member. Some of the rights of an LLC include owning property, opening bank accounts, owning a business, and selling property.

As a sole proprietorship, you leave yourself vulnerable to a lawsuit as the filing party can sue you personally. The EIN is used for opening business bank accounts, filing taxes, handling payroll, and obtaining business credit. Some states require that you reapply for a license when your business structure changes. You can contact your local office or a site like BusinessLicenses.

Best of luck on your business venture, and congratulations on taking this important step toward creating a solid foundation for your new business. Thanks for reading and commenting. Because an LLC is a separate legal entity, one does generally need to update a new employer identification number when starting a new LLC. If you would like further assistance or have additional questions, my company CorpNet. I have a property management company that is current a sole proprietorship.

Hi Rosa — thank you for your question. Are you referring to the employer tax ID number perhaps? Feel free to email me directly at info at corpnet dot com. All rights reserved.